1. Use the AS/AD model to describe the effect of each of the following events on the economy of Snezhanka (a fictitious nation). Beginning with the economy in equilibrium carefully show the shift involved and the new equilibrium. State whether the P (price level) and RGDP at the new equilibrium are higher or lower. For each part of this question, start again at the original equilibrium. What will happen if:
A. Taxes on households are decreased?
B. Taxes paid by firms are decreased?
C. The value of the national currency, the Snezhankan lev, declines in the international currency market?
D. A revolutionary new machine, the aparat, increases worker productivity?
2. Let’s consider the effects of immigration on an economy.
A. Imagine that a large number of people immigrate to a country, but the government doesn't allow them to work. What effect will this have on the AS/AD model? Answer with a graph and in words.
B. Now begin again and imagine a large number of people immigrate to a country, but the government requires that they all find jobs. What effect will this have on the AS/AD model? Answer with a graph and in words.
C. How will the effect of immigration on RGDP and P differ if the immigrants are allowed to work instead of prohibited from working?